By Naomi Lopez Bauman -
The Washington Times -
Friday, September 17, 2010

ANALYSIS/OPINION:

We may be witnessing the single worst example of corporate welfare in a generation. With all due respect to the crowd favorite, Archer Daniels Midland, the new contender essentially could give its product away and still make a profit - thanks to the generosity of the American taxpayer.

At the heart of the rip-off is a policy known as the “cover over” tax subsidy, which provides Puerto Rico and the U.S. Virgin Islands (USVI) a rebate on the federal excise taxes U.S. consumers pay when they buy rum produced in those territories. There are virtually no restrictions on the use of the money - though Puerto Rico currently uses 94 percent of the revenues to support investments in infrastructure, health, education and environmental preservation. (The additional 6 percent is spent on marketing for the island’s rum industry.)

To increase its revenue from the program, the Virgin Islands’ government two years ago signed an agreement with the British liquor conglomerate Diageo in which the company agreed to move its Captain Morgan rum distillery from Puerto Rico to USVI. Under the agreement, which makes the federal government’s policy of paying farmers not to grow crops look penurious, the USVI government will give Diageo nearly half of all cover-over revenues generated by Captain Morgan sales.

The deal also gives Diageo a 90 percent corporate income tax reduction and exemptions on real property taxes, gross receipts taxes and excise taxes on materials and equipment. Diageo also will receive a state-of-the-art distillery financed with a $250 million USVI government bond, with future cover-over revenues used to repay the bond. At the end of the initial 30-year contract, which Diageo can renew at will for an additional 30 years, the facility will be deeded to the company.

Though economic incentive programs to lure jobs and industry to an area are nothing new, few can match this deal on the cost per promised job. During the agreement’s initial 30-year life span, Diageo could receive about $2.7 billion in direct payments, tax benefits and facilities. Yet, under the agreement, Diageo promises to hire just 40 workers - just 32 of whom must be USVI residents. That is well over $2 million per job per year.

Worse, about 350 jobs were lost in Puerto Rico - meaning the Diageo deal produced a net loss of 310 jobs. If you cost this out, it means the U.S. government, in effect, is paying a foreign company more than $19 million for each job it kills.

Another extraordinary distinction of the deal is that the direct subsidy Diageo will receive is worth about twice the cost of its rum production (even excluding the cost of the free manufacturing facility). The cost of producing a gallon of rum in a Puerto Rican distillery is $3.07 per “proof gallon.” Diageo will receive as much as $6.38 per proof gallon for producing the same rum. This means the company could sell the rum for 1 cent plus the excise tax and still make money.

Legislation that would put a 10 percent limit on the amount of cover over-revenue that can be paid directly to a private company has been introduced in both the House and Senate, but former Ways and Means Committee Chairman Charles B. Rangel, New York Democrat, buried the House bill. The Senate bill was referred to the Finance Committee.

At a time when the United States is facing seemingly intractable unemployment problems, Congress shouldn’t be lining the pockets of foreign companies - and especially shouldn’t be paying a company $19 million for every job it destroys.

Following the November election, if not sooner, House Ways and Means Committee Chairman Sander M. Levin, Michigan Democrat, and Senate Finance Committee Chairman Max Baucus, Montana Democrat, should schedule hearings to re-examine the purpose of decades-old cover-over tax rebate policy. There is something amiss when U.S. territorial governments use federal tax revenues to provide lavish subsidies to private firms.

If Congress turns a blind eye to this outrageous corporate welfare giveaway, it will confirm the worst fears of many voters: that politics today is an inside game between those seeking favors and those giving them away - with the hapless taxpayer as the involuntary banker. Such abuses need to end.

Naomi Lopez Bauman is a public-policy consultant and an adjunct fellow with the Pelican Institute in Louisiana.